Apple could lose the billions its gets from Google, but Wall Street sees a rosy future

The amount Google pays to Apple came to light in the U.S. Department of Justice’s lawsuit against Google this month. The hefty sum, the DOJ argues, gives Google an unfair advantage over smaller rivals that can’t afford to buy that kind of market share. That sum could go away, depending on the outcome of the lawsuit.

Apple directs the payments from Google to its “services” category — a part of Apple’s earnings that Wall Street pays close attention to, with iPhone sales on the decline. Apple, for instance earned $26.44 billion from iPhone sales this quarter, down from $33.36 billion a year ago, missing analysts’ expectations and sending the stock down more than 5 percent in after-hours trading Thursday. The services category accounts for the revenue Apple is generating in new areas like online streaming and video games.

Apple’s services revenue has risen steadily and was up 16 percent this quarter to $14.55 billion, playing a big part in the company’s lofty valuation. But the Justice Department lawsuit reveals that nearly a quarter of that comes from Google. In essence, Apple’s most valuable service is cashing checks from Google, according to the lawsuit.

But Wall Street isn’t worried, reflecting the resilience of Apple that has led it to a $2 trillion valuation, the first publicly traded company in the U.S. to reach that threshold. “The Street is not overly concerned about this dynamic for now, although it highlights how important Google is to Apple services business,” said Dan Ives, an analyst at Wedbush Securities. And even if Google’s contribution to Apple’s bottom line was reduced, it would be less costly than the alternative: Apple launching a competing search engine.

On a conference call with analysts Thursday, Apple chief executive Tim Cook downplayed the significance of its deal with Google, touting Apple’s growing number of services. “There’s a lot of room there and potential there,” Cook said. “I have no idea how the DOJ suit will go, but I think it’s a long way from a conclusion on it.”

The collective shrug from analysts highlights the depths of investor faith in the iPhone maker and Cook. When Steve Jobs died, there were plenty of predictions that Apple’s star would fade, but it became the most valuable company in the world. When the smartphone market plateaued, Apple reached new heights. And during a global pandemic, Apple barely broke stride. The potential loss of the Google search deal may not even rank as one of Cook’s biggest challenges.

Analysts say Apple is probably going to get through this unscathed for a handful of reasons. First, the Justice Department’s lawsuit will take years at best. At worst, it will fizzle out in a court system friendly to corporate interests, and if a new party enters the White House next year, the government resources allocated to the suit could change. Second, even if the lawsuit is successful, it’s unlikely the payments from Google will stop. More likely, they’ll be reduced. And third, the rest of Apple’s services business is probably growing much faster than its annual payment from Google.

The search deal between Apple and Google came to light six years ago, in a lawsuit between Apple and Oracle. Back then, Google was paying Apple $1 billion a year. Analysts had predicted the fee had grown, but the idea that it had ballooned twelvefold was shocking.

“That is a big part of services and services is a big part of why investors have become more comfortable with the story,” says Gene Munster, an analyst at venture firm Loup Ventures. But Munster looks at it from another angle. Google’s growth has been slowing, which means its payments to Apple would probably not get much larger over time. At the same time, Apple wants to show its services business is growing at a pace much higher than Google’s rate of growth. Munster said that having Google’s money mixed in with high-growth areas like music streaming and movies might be a “drag to the growth” of one of its most important Wall Street metrics.

The Google lawsuit has also revived fresh speculation that Apple might launch its own search engine to compete with Google. The concept is simple: If Apple is going to lose its lucrative Google deal, it could make up for the loss by building its own search engine and selling search ads. After all, Apple’s head of artificial intelligence, John Giannandrea, once ran Google’s search business.

But Apple competing with Google in search would be incongruous with Apple’s rhetoric around privacy. Cook has criticized the business models of companies like Google. Collecting data, both to sell advertisements and to improve search results, would represent a major change for the company that could limit its growth in other areas. It’s one thing to take money from Google. It’s quite another to try to become Google.

Another complicating factor for a hypothetical Apple search engine: It controls less than 14 percent of the global smartphone market. Almost all the rest belongs to Google. That means Google will always have more data to improve search results and targeted advertisements. Apple will be fighting an uphill battle to make its search engine as good as Google’s.

With the dark clouds of antitrust lawsuits on the horizon, analysts expect Apple will do the same thing that got them to $2 trillion: Stay the course.

Source:WP